CEA recommendations - a primer

Recommendations on GST rates by the Committee headed by Chief Economic Adviser Arvind Subramanian seems to be a much needed impetus in the push for introduction of Goods and Services Tax or GST in India.

Recommendations on GST rates by the Committee headed by Chief Economic Adviser (CEA) Arvind Subramanian seems to be a much needed impetus in the push for introduction of Goods and Services Tax or GST in India.

While the intent of the report essentially seems to be to shed some light on the rate structure, it seeks to provide some context and background to the proposed regime itself.

Key noteworthy statements in this regard are:

That the GST initiative has required broad consensus across the political spectrum and co-operative federalism;

That introduction of GST will validate expectations of positive government actions, and that it could well be the global standard for a value added tax regime in large federal systems;

That the true efficacy of the GST regime will be dependent on key decisions taken by the GST Council in relation to coverage of goods, the extent of exemptions with the emphasis being on greater inclusion and fewer exemptions; and

Lastly, that India is on the verge of executing one of the most ambitious tax reforms and it is time to capture this historic opportunity

Recommended rate

The report has recommended a low rate, standard rate, demerit rate and rates for precious metals, which are based on the concept of revenue neutral rate ('RNR'). These rates have been recommended with the objective to preserve interest of revenue, simplify administration, encourage compliance, avoid inflationary pressure and keep India within the range of countries with reasonable levels of indirect taxes.

Summary of the recommended rates is tabulated below:

RNR refers to a single rate which will preserve the revenue of the Centre and the States at current desired level under the GST regime. RNR has been recommended to be in the range of 15 per cent to 15.5 per cent, which will be the overall outcome after applying different GST rates.

As indicated in the Table, the standard rate is in the range of 16.9 per cent to 18.9 per cent, depending on the rates applied to precious metals, demerit goods, and depending on the extent of exemptions/ benefits granted. This recommended rate is significantly lower than the combined median indirect taxes (excise and VAT) currently levied on manufacturing companies. Services sector may feel the pinch as the current rate is only 14.5 per cent, impacting B2C transactions. Further, the Report also suggest that the medium-term goal should be to strive towards a one-rate GST structure.

Other recommendations

Equally significant are the CEA's recommendations on two of the contentious issues that are currently being debated by the political parties.

Regarding the proposed levy of 1 per cent additional tax, the CEA has suggested eliminating the same. If accepted, it would achieve the required political consensus to move the GST juggernaut forward. It would also result in implementing a less flawed GST regime. The Report has also recommended that it would be advisable not to detail the proposed GST rate in the Constitution itself, via the amendment bill. On this aspect too, the CEA has struck a pragmatic note.

Overall, the report comes at the right time with a much needed right message!